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Rate cut is the only way out of economic slowdown, feel analysts

Illustration by Binay Sinha
With the slowdown in economic growth, the clamour for a cut in interest rates has been growing. Though the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) led by Shaktikanta Das has cut rates by over 100 basis points (bps) brining the repo rate to 5.15 per cent – the lowest level since 2010 – analysts expect the central bank to be more aggressive going ahead.

A recent report by Bank of America Merrill Lynch suggests the cut in interest rates is the only way out of the economic slowdown India is facing. They expect the RBI to slash rates by 25 basis points (bps) in its December monetary policy review and follow it up with another 15 bps cut in February 2020. The foreign research and brokerage house has also cut its gross domestic product (GDP) forecast for financial year 2019-20 (FY20) to 5.8 per cent.

“We reiterate our call that lending rate cuts are the only way out of the on-going slowdown. The bad news is that still-high real lending rates and relatively muted Diwali demand have led us to formalize a 30bps cut to our FY20 GVA growth forecast to 5.8 per cent on still-high real lending rates and relatively weak Diwali demand,” wrote Indranil Sen Gupta, director and India Economist at BofAML in a recent co-authored report with Aastha Gudwani, their India economist.

Analysts at Credit Suisse and Nomura, too, expect the interest rates to head south. Nomura, for instance, expects a 15 bps cut in repo rate to 5 per cent by the central bank in its next policy review in December.

“The MPC appears to be trying to signal to the bond market that rate cuts may keep coming, particularly as it has sharply cut growth forecasts. Lower rates are a necessary condition for the economy to pick up, even if no longer sufficient,” wrote Neelkanth Mishra, co-head of equity strategy, Asia Pacific & India Equity Strategist at Credit Suisse in a recent note.

Meanwhile On Tuesday, registering 49.2 in October, the IHS Markit India Services Business Activity Index signalled a second consecutive decline in output. However, rising from 48.7 in September, the headline figure was indicative of a marginal and slower rate of reduction. 

“Anecdotal evidence highlighted subdued demand conditions, competitive pressures and a fragile economic situation. October data indicated that demand weakness was centred on the domestic market, with exporters posting an increase in international sales,” IHS said in a release. 

The manufacturing sector, too, is grappling with contraction with the headline seasonally adjusted IHS Markit India Manufacturing PMI slipping from 51.4 in September to a two-year low of 50.6 in October. Growth was restored in capital goods and softened in the consumer goods category, while a contraction was registered at intermediate goods makers.

On its part, the government expects the July-September quarter GDP to come in below 5 per cent and go below the growth seen in the April-June quarter, reports suggest. GDP growth had last slipped below this level in January-March quarter of 2012-13, when it had touched 4.3 per cent. 

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